In this webpage we will use the same example used in the previous session to illustrate how to prepare a Statement of Changes in Equity.
In section 3.09 we identified where the accounts in the trial balance would be recorded and how the notes would affect the figures. These are replicated below.
Review of the notes
- Deprecation charges will directly affect the expenses in the Statement of Profit or Loss and the value of property, plant and equipment in the Statement of Financial Position
- £35,000 will be recorded as Cost of Sales (i.e. 50% of £70,000)
- £21,000 will be recorded as Selling & Distribution Expenses (i.e. 30% of £70,000)
- £14,000 will be recorded as Administrative Expenses (i.e. 20% of £70,000)
- Property, plant & equipment will be reduced by £70,000
- A property revaluation will directly affect Other Comprehensive Income, the value of property and the Revaluation Reserve
- Property, plant & equipment will be increased by £520,000 (i.e. the difference between its current carrying value of £280,000 and its fair value of £800,000)
- The gain on revaluation will be recorded in Other Comprehensive Income
- A revaluation reserve of £520,000 will be created
- Closing inventory will affect the calculation of Cost of Sales and will be included in Current Assets
- Inventory will be valued at £233,000 (i.e. £243,000 less £35,000 plus £25,000)
- The year-end accrued expense will affect Cost of Sales and Trade & Other Payables
- Cost of Sales will be increased by £12,000
- Trade & Other Payables will be increased by £12,000
- The doubtful debts will affect Administrative Expenses and Trade & Other Receivables
- Administrative expenses will be reduced by £4,000
- Trade & Other Receivables will be increased by £4,000
- The tax charge and over-provision will affect the Tax in the Statement of Profit or Loss and the Tax in Current Liabilities
- The Tax charge in the Statement of Profit or Loss will be £50,000 (i.e. the current year’s charge of £53,000 less the previous year’s over-provision of £3,000)
- The Tax liability in the Statement of Financial Position will be current year’s tax charge of £53,000
- The issue of shares will affect the Share Capital and Share Premium columns in the Statement of Changes in Equity
- The figures in the trial balance show the position at the end of the year, after the effects of the share issue. When preparing the Statement of Changes in Equity we will have to work backwards to calculate the balances of Share Capital and Share Premium at the start of the year
- The note about the continuing operations will not affect the preparation of these financial statements
Initial Statement of Changes in Equity
There are three types of Equity identified in the trial balance; Share Capital, Share Premium and Retained Earnings. The trial balance records the values of Share Capital and Share Premium at the end of the year and the value of Retained Earnings at the beginning of the year..
In addition, Note 2 of the additional information tells us that a property was revalued which means that a Revaluation Reserve must have been created in the year. The balance at the start of the year will therefore be £nil.
Our initial Statement of Changes in Equity will therefore be as follows:
The share issue
The notes tell us that 50,000 ordinary shares of £1 each were issued during the year at a price of £3 each. This means that Share Capital was increased by £50,000 in the year (i.e. the number of shares issued multiplied by the nominal price per share, or 50,000 x £1) and Share Premium was increased by £100,000 in the year (i.e. the total received from the share issue of £150,000 less the increase in Share Capital of £50,000).
These amounts can then be recorded in a line in the statement to record the effect of the share issue. Once this is recorded we can calculate the values of Share Capital and Share Premium at the start of the year as these will be the closing balances less the increases associated with the share issue.
The updated statement is shown below.
Transfer of total comprehensive income
Next we can transfer information from the Statement of Profit or Loss & Other Comprehensive Income.
- The profit for the year of £216,000 will be added to Retained Earnings
- The gain on revaluation of £520,000 will be added to the Revaluation Reserve
These will be recorded in a line headed “Total Comprehensive Income”. Note that if there were no types of Other Comprehensive Income made in a year, we would simply use term “Profit for the year”
Lastly, we can record the dividends straight from the trial balance. These will be deducted from Retained Earnings.
The completed statement of changes in equity
Totals for all rows and columns in the statement can be calculated and entered and the statement is now complete.